In last week’s column, we looked at the value-added benefits of a PAC – a Pre-Authorized Contribution program through which you make automatic monthly contributions to your RRSP and other investments. A PAC is an easy way to invest – you hardly know you’re doing it – but it delivers significant financial benefits for two very good reasons.  First, every one of your regular contributions has longer to grow – and thanks to the miracle of compounding you can add a significant amount to your nest egg come retirement.  Second, you’ll enjoy the benefits of dollar cost averaging – meaning that, with an investment in mutual funds for example, you buy fewer units when prices are high and more units when prices are low; over time that usually results in a lower average cost to you for your mutual fund investments.

Those benefits are enhanced when you regularly ‘PAC-up’ to stay current with your rising income and the rate of inflation.  It’s simple to ‘PAC-up’, just add an annual increase to your PAC program – either a lump sum dollar amount or a percentage – that reflects your changed circumstances.  You’d be surprised at the bottom line results those extra few dollars will bring.  Here’s an example: By increasing your $300/month PAC by 3% per year, you’ll have $42,533 more in 20 years than if you had continued to invest solely the original amount, if we assume an annual compound rate of return of 8%.* But a PAC, while fundamental to reaching your long-term goals, is only one element in a comprehensive financial plan.  Another is asset allocation – and it’s the key to maintaining and enhancing the value of your investment portfolio over time.

Asset allocation means constructing and maintaining a portfolio with the right ‘mix’ of investments to balance risk and create diversification by dividing assets among categories such as bonds, stocks, cash and other investments.  Each asset class has different levels of return and risk, and each will behave differently over time. A properly balanced portfolio strategically spreads your investments among the different types of financial assets so they effectively work together to build your wealth, while reducing your exposure to unexpected market events. 

The ‘mix’ in your portfolio should also match your tolerance for risk – and that’s where the need for regular portfolio rebalancing comes in.  Depending on market activity, your portfolio may become too heavily weighted in one or more of the asset classes – away from equities toward fixed income investments, for example.  It’s important to rebalance your portfolio back to target, because sticking to your long-term asset mix (and adjusting that mix when needed as you grow older or as your lifestyle changes) is the best way to ensure you meet your investment goals with peace of mind.

Portfolio mutual funds (also known as ‘fund of funds’) offer an easy solution to rebalancing and to simplicity of reporting for tax purposes.  This type of fund invests in as many as nine or ten mutual funds specifically selected to reflect the portfolio’s objectives – giving you the scope to choose a portfolio fund that matches your personal risk/reward level and requirements for long-term growth.  You can also choose a ‘fund of funds’ that allows you to spread your investment dollars over different asset classes, economies, currencies and management styles – providing instant rebalancing and diversification as well as improved prospects for consistent growth over time.  Plus you get the added bonus of an easy-to-read statement and one tax slip.

When you start with a PAC and attach it to the right investment PAC-age, you’ll jump-start your journey to financial independence.  But to stay the course means keeping everything in balance, and portfolio construction and rebalancing can include some difficult investment decisions.  A professional financial advisor can help you weigh and select the right investments for your situation and show you how to PAC correctly for the journey.

*The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future returns on investment.